News: Realty funds fail to bag Indian deals

(TT 23/10/2006) Mumbai - The moneybags are swarming the market — but they are starved of options to strike deals.

International real estate funds have piled into India after the government threw open the sector but they are unable to find local partners who will make effective use of the moolah.

According to industry estimates, close to $3 billion has come into the country through India-dedicated realty funds.

Dearth of deals

“We have the money but no deals have happened. As a result, we have had to change our strategy recently,” said Balaji Rao, country head of Starwood Capital. The firm plans to invest close to $200 million over the next several months.

It should have been a really good fit. Real estate developers are facing a cash crunch after the RBI raised the risk weightage on commercial real estate loans to 150 per cent.

“Yes, the number of deals has not been high,” said Anuj Puri, MD of Trammell Crow Meghraj Property Consultants.

“There are two reasons for this,” said Puri. “First, land owners’ or developers’ expectations have increased. They are asking for a premium on the price they have bought the land at. Second, the due diligence process is long and tedious and the funds can find this irksome.”

The problem is not just with small real estate developers. “A year back, the situation was different. It was mainly the tier II developers who were facing this problem. Now, even tier I developers face a problem. The funding requirements of tier I developers are huge and they are taking larger positions. As a result, deal sizes are bigger, but it is taking a long time to conclude,” he added.

The time factor

“We are more interested in a long-term relationship. If we decide to invest, we first evaluate the project, the developer, carry out due diligence and it is a fairly long process. Developers are looking more at short-term relationships. So, yes, there is a dearth of deals,” added Anandjit Sunderaj, CIO of TCG Real Estate.

The company is in the process of closing its $500-million India real estate fund. The increase in risk weightage on real estate lending by banks has had mainly two implications: first, the cost of borrowings has gone up by at least 50 basis points and, second, banks are becoming careful in selecting developers and projects for debt lending.

Result: small-time developers are facing difficulty in raising bank loans.

“This situation means that real estate projects can leverage less, and hence would have to rely on equity funds to finance their projects. However, these funds prefer developers with good land parcels,” said Sunderaj.

Developers’ dilemma

The developers also have their cup of woes.

“The situation in India is very different from the rest of the world. Approvals take more time here... International funds don’t understand that,” said Mukesh Patel, head of Neelkanth Group. “Besides, these funds are looking at a three to five-year time frame, while we want to get into a five to seven-year time frame.”

Nitin Gupta, associate director at PricewaterhouseCoopers, said, “Over the last three to six months, at least 10 to 15 deals have been closed and funds released.”

“The challenge is to strike the right deal with a developer who is able to provide a professional working environment for investors. Developers need to understand the synergies that could accrue from such relationships rather than focus on maximum entry valuation,” said Archana Hingorani, ED of IL&FS Investment Managers Ltd.